Pinnacle Data Systems, Inc. ("PDSi") (NYSE Amex: PNS) today
reported its financial results for the three months and year ended
December 31, 2010.
John D. Bair, Chairman of the Board, President and Chief
Executive Officer, stated, "Our focus over the last year was on
quickly returning the Company to profitability, and our results
compared to 2009 are remarkable. We finished 2010 a much stronger
Company than when the year began, but we still have work to do. We
made business development investments late in 2010 targeted to
develop our specialized design services and product integration
business. Over 2011, we will continue to work to develop, and close
on, a pipeline of business opportunities in these targeted
areas."
"In 2011, we are focusing on profitable growth of the overall
business," Mr. Bair continued. "We are working on growth
opportunities in all three of our targeted markets: Electronic
Repair Services, Integrated/ODM Computing Solutions and Embedded
Computing Products."
Total sales were $6.4 million for the 2010 fourth quarter, up
slightly versus the third quarter of 2010. Gross profit as a
percentage of sales for the quarter was down slightly compared to
Q3 to 34% based on a shift in mix toward Products versus the higher
margin Service segment. Timothy J. Harper, Chief Operating Officer,
added, "In the fourth quarter, we continued to see the improved
margin levels that were key to our return to profitability. Our
focus on efficiency and profitable Service programs resulted in an
improvement in gross profit as a percentage of revenue from 20% in
the first half of 2009 to 35% in the second half of 2010. In fact,
we managed to improve our gross profit by almost 10% on a dollar
basis for these periods despite a decline in overall revenue. As we
move forward, we are committed to devoting additional resources to
continue this Service growth and to develop our Product business by
targeting markets requiring our high value-added engineering."
The $0.8 million profit, or $0.10 per diluted share, reported
for the fourth quarter included a $0.5 million net tax benefit for
estimated research and development ("R&D") tax credits for tax
years 2001 through 2010. The Company periodically has considered
the potential tax savings associated with R&D credits. Based on
the recent positive changes in the Company's financial results, as
well as the use of existing NOL carryforwards, the Company
determined that the realizable tax benefits were worth
pursuing.
Cash generated from operations was $0.4 million, the eighth
sequential quarter with positive operating cash flow. "We continue
to realize the cash flow benefits from our return to profitability
and our continued focus on managing our net working capital," Mr.
Bair added. "We generated $2.3 million in cash from operations
during 2010, and we reduced our line of credit balance from $2.4
million at the end of 2009 to under $0.3 million at the end of
2010."
2010 Fourth Quarter Financial Results
Net Income (Loss)
Net income for the fourth quarter of 2010 was $0.8 million, or
$0.10 per diluted share. This compares to a net loss of $0.4
million, or $0.05 per diluted share, for the same quarter last
year. The fourth quarters of 2009 and 2010 were both impacted by
nonrecurring items. Q4 2010 included the $0.5 million R&D tax
credit benefit previously mentioned. Q4 2009 included $1.0 million
of severance and other charges related to the implementation of the
Company's plan to focus on its core Service business and current
product offerings, flatten its organizational structure, and reduce
overhead costs; partially offset by a $0.3 million tax benefit
associated with Federal tax law changes allowing a longer carryback
of losses for application against previous years' earnings. The
following is a summary of the components of the Company's income
tax benefit for the fourth quarters of 2010 and 2009 (see the
Company's upcoming Form 10-K filing for the year ended December 31,
2010 for additional disclosures related to these tax items):
$ thousands Q4 2010 Q4 2009
---------- ----------
Income (loss) before income taxes $ 403 $ (699)
---------- ----------
Income tax expense (benefit)
Income tax expense (benefit) related to the
quarter 102 (18)
R&D tax credit benefit (480) -
Deferred tax carryback benefit - (291)
---------- ----------
Net tax benefit (378) (309)
---------- ----------
Net income (loss) $ 781 $ (390)
========== ==========
Sales
Total sales declined 27% to $6.4 million for the 2010 fourth
quarter from $8.7 million for the same quarter a year ago. Fourth
quarter Product sales declined 51% to $2.6 million in 2010 from
$5.3 million in 2009. This decline primarily was attributable to
significantly lower sales to larger imaging and diversified
computing OEM customers. Service sales increased $0.4 million, or
12%, to $3.7 million for the 2010 fourth quarter, with the growth
attributable to the ramp of business in the U.S. and EMEA for both
new customers and new programs within existing customers.
Gross Profit
Gross profit improved 24% to $2.1 million for the 2010 fourth
quarter, from $1.7 million for the same quarter last year. The 2009
fourth quarter gross profit included a nonrecurring inventory
charge of $0.1 million, or 1.6% of revenue, related to implementing
the plan described earlier to refocus the business. Gross margin as
a percentage of revenue improved from 20% to 34% compared to last
year. The gross profit improvement on lower year-on-year total
sales largely was attributable to the change in mix driven by the
growth of higher margin Service segment revenue. Within the Service
segment, margins as a percentage of revenue improved from 35% to
41%, driven by a shift toward higher margin programs and improved
operating leverage on increased sales. Product gross margin
improved compared to the prior year quarter from 10% to 24%, driven
by a shift in mix toward higher margin Product business.
Operating Expenses
Operating expenses were reduced 27% to $1.7 million for the 2010
fourth quarter from $2.4 million a year ago. The fourth quarter of
2009 included $0.8 million in severance expenses related to
implementing the aforementioned plan to refocus the business.
Interest Expense
Interest expense for the 2010 fourth quarter was reduced 82% to
$6,000 from $34,000 for the same quarter last year due to lower
average debt outstanding. Debt outstanding was reduced to less than
$0.3 million from $2.4 million at the end of the prior year fourth
quarter.
2010 Annual Financial Results
Net Income (Loss)
Net income for 2010 was $3.1 million, or $0.38 per diluted
share. This compares to a net loss of $3.5 million, or $0.44 per
diluted share, for 2009. In addition to the $1.0 million of
severance and other charges related to the Q4 2009 implementation
of the Company's plan to focus on its core Service business and
current product offerings, flatten its organizational structure,
and reduce overhead costs, both 2009 and 2010 were impacted by
several significant nonrecurring tax items. These tax items (which
for clarity are broken out in the table below) included a Q3 2009
$1.6 million non-cash charge to establish a deferred tax valuation
allowance; a Q3 2010 $1.5 million non-cash net benefit for the
reversal of all but the portion of the valuation allowance related
to certain state net operating loss carryforwards; a Q4 2009 $0.3
million tax benefit associated with Federal tax law changes
allowing a longer carryback of losses for application against
previous years' earnings; and a Q4 2010 $0.5 million R&D tax
credit benefit. (See the Company's upcoming Form 10-K filing for
the year ended December 31, 2010 for additional disclosures related
to these tax items).
$ thousands FY 2010 FY 2009
---------- ----------
Income (loss) before income taxes $ 1,673 $ (2,785)
---------- ----------
Income tax expense (benefit)
Income tax expense (benefit) related to the year 582 (615)
Deferred tax valuation allowance expense
(benefit) (1,492) 1,571
R&D tax credit benefit (480) -
Deferred tax carryback benefit - (291)
---------- ----------
Net tax expense (benefit) (1,390) 665
---------- ----------
Net income (loss) $ 3,063 $ (3,450)
========== ==========
Sales
Total sales declined 17% to $29.4 million for 2010 from $35.6
million for 2009. Product sales declined 36% to $15.7 million in
2010 from $24.5 million in 2009. This decline primarily was
attributable to significantly lower sales to larger imaging,
medical and diversified computing OEM customers. Service sales
increased $2.6 million, or 23%, to $13.7 million for 2010, with the
growth attributable to the ramp of business in the U.S. and EMEA
for both new customers and new programs within existing
customers.
Gross Profit
Gross profit improved 20% to $8.8 million for 2010, from $7.3
million for 2009. The 2009 gross profit included a fourth quarter
nonrecurring inventory charge of $0.1 million, or 0.4% of revenue,
related to implementing the plan described earlier to refocus the
business. Gross margin as a percentage of revenue improved from 21%
to 30% compared to last year. The gross profit and gross margin
improvement on lower year-on-year total sales was attributable to
the change in mix driven by the growth of higher margin Service
segment revenue. Within the Service segment, margins as a
percentage of revenue improved from 33% to 42%, driven by a shift
toward higher margin programs and improved operating leverage on
increased sales. Product gross margin improved compared to prior
year from 15% to 20%, driven by a shift in mix toward higher margin
Product business.
Operating Expenses
Operating expenses were reduced 29% to $7.0 million for 2010
from $9.9 million a year ago, reflecting the benefit of actions
taken over the past year to better focus resources on the Company's
core products and services growth strategy. Wages and other
employee costs accounted for most of the reduction. Additional
savings were realized across multiple areas, including company
funded R&D expenses, reflecting the Company's strategic focus
on developing customer-specific solutions through customer funded
development projects. The fourth quarter of 2009 included $0.8
million in severance expenses discussed previously related to
implementing this plan.
Interest Expense
Interest expense for 2010 was reduced 70% to $51,000 from
$176,000 in 2009 due to lower average debt outstanding. Debt
outstanding was reduced to $0.3 million from $1.7 million at the
end of 2009.
Recent PDSi Highlights
-- Service segment revenue for 2010 of $13.7 million set an annual record
for PDSi, eclipsing the previous high of $11.1 million in 2009.
-- On December 2, 2010, PDSi announced a powerful upgrade to its
military-proven ATCA-F1 Compute Blade. Incorporating Dual, Six Core
AMD Istanbul processors delivers 12 cores, providing a performance
boost versus the Shanghai (8 cores) or Santa Rosa (4 cores)
configurations. In addition, a new 32 GB memory option brings enhanced
virtualization performance.
-- On October 4, 2010, PDSi announced that it had achieved Gold Partner
status in the Oracle PartnerNetwork. By attaining Gold Level
membership, Oracle has recognized PDSi for its capability and
commitment to design, deliver and support Oracle-based technology
solutions customized to customers' specialized needs.
Conference Call
PDSi will host a conference call on Thursday, March 3, 2011, at
11:00 a.m. EST. John D. Bair, President, Chief Executive Officer,
and Chief Technology and Innovation Officer; Timothy J. Harper,
Chief Operating Officer; and Nicholas J. Tomashot, Chief Financial
Officer, will discuss the Company's 2010 fourth quarter and annual
results.
The telephone number to participate in the conference call is
(877) 485-3107. A slide presentation will be referenced during the
call, which may be accessed at the PDSi website (www.pinnacle.com)
by clicking on "Investor Relations" and then "Conference Calls." An
audio replay of the call will be available through the Investor
Relations section of the Company's website approximately one hour
following the conference call.
About PDSi
PDSi is a global provider of Electronics Repair and Reverse
Logistics Services, ODM/OEM Integrated Computing Services, and
Embedded Computing Products and Design Services for the Diversified
Computing, Telecom, Imaging, Defense/Aerospace, Medical,
Semiconductor and Industrial Automation markets. PDSi provides a
variety of engineering and manufacturing services for global OEMs
requiring custom product design, system integration, repair
programs, warranty management, and/or specialized production
capabilities. With facilities in the U.S., Europe and Asia, we
ensure seamless support for solutions all around the world.
More than just an ODM, integrator or reverse logistics provider,
PDSi's engineering, technical and operational capabilities span the
entire product lifecycle allowing us to better understand and
develop custom solutions for each of our customer's unique
requirements. Our product capabilities range from board-level
designs to globally certified, fully integrated systems,
specializing in long-life computer products and unique,
customer-centric solutions. Our capability to perform higher-level
repair services in-region allows us to customize solutions for our
customers so that they can deliver world-class service levels to
their customers with reduced logistics, component replacement and
inventory costs.
"PDSi puts computer technologies to work for our customers."
For more information, visit the PDSi website at
www.pinnacle.com.
Safe Harbor Statement
Portions of this release include forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, including, but
not limited to, statements regarding the Company achieving its
financial growth and profitability goals, or its sales, earnings
and profitability expectations for the year ending December 31,
2011. The words "believe," "expect," "anticipate," "estimate,"
"intend," "seek," "may" and similar expressions identify
forward-looking statements that speak only as of the date of this
release. Investors are cautioned that such statements involve risks
and uncertainties that could cause actual results to differ
materially from historical or anticipated results due to many
factors. These factors include, but are not limited to, the
following:
-- changes in general economic conditions, including prolonged or
substantial economic downturn, and any related financial difficulties
experienced by original equipment manufacturers, end users, customers,
suppliers or others with whom the Company does business;
-- changes in customer order patterns;
-- changes in our business or our relationship with major technology
partners or significant customers;
-- failure to maintain adequate levels of inventory;
-- production components and service parts cease to be readily available
in the marketplace;
-- lack of adequate financing to meet working capital needs or to take
advantage of business and future growth opportunities that may arise;
-- inability of cost reduction initiatives to lead to a realization of
savings in labor, facilities or other operational costs;
-- deviation of actual results from estimates and/or assumptions used by
the Company in the application of its significant accounting policies;
-- lack of success in technological advancements;
-- inability to retain certifications, authorizations or licenses to
provide certain products and/or services;
-- risks associated with new business practices, processes and information
systems;
-- impact of judicial rulings or government regulations, including related
compliance costs;
-- disruption in the business of suppliers, customers or service providers
due to adverse weather, casualty events, technological difficulty, acts
of war or terror, or other causes;
-- risks associated with doing business internationally, including
economic, political and social instability and foreign currency
exposure; and
-- other factors from time to time described in the Company's filings with
the United States Securities and Exchange Commission ("SEC").
The Company undertakes no obligation to publicly update or
revise any such statements, except as required by applicable law.
For more details, please refer to the Company's SEC filings,
including its most recent Annual Report on Form 10-K and Quarterly
Reports on Form 10-Q.
PINNACLE DATA SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31,
--------------------------
2010 2009
------------ ------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash $ 465 $ 323
Accounts receivable, net of allowance for
doubtful accounts of $106 and $232,
respectively 4,469 5,932
Inventory, net 3,226 3,754
Deferred income taxes 762 22
Prepaid expenses and other current assets 492 503
------------ ------------
Total current assets 9,414 10,534
------------ ------------
PROPERTY AND EQUIPMENT
Property and equipment, cost 6,056 5,899
Less accumulated depreciation and amortization (5,371) (5,038)
------------ ------------
Total property and equipment, net 685 861
------------ ------------
OTHER ASSETS
Goodwill 767 821
Deferred income taxes 929 52
Other assets 193 307
------------ ------------
Total other assets 1,889 1,180
------------ ------------
TOTAL ASSETS $ 11,988 $ 12,575
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 273 $ 2,413
Accounts payable 1,404 2,694
Accrued wages, payroll taxes and employee
benefits 581 1,014
Unearned revenue 30 85
Other current liabilities 743 555
------------ ------------
Total current liabilities 3,031 6,761
LONG-TERM LIABILITIES
Accrued other 296 226
------------ ------------
TOTAL LIABILITIES 3,327 6,987
------------ ------------
STOCKHOLDERS' EQUITY
Common stock 5,790 5,769
Additional paid-in capital 1,962 1,912
Accumulated other comprehensive income (loss) (90) (29)
Retained earnings (deficit) 999 (2,064)
------------ ------------
Total stockholders' equity 8,661 5,588
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 11,988 $ 12,575
============ ============
PINNACLE DATA SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share)
For the Three Months For the Years Ended
Ended December 31, December 31,
------------------------ ------------------------
2010 2009 2010 2009
----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited)
Sales $ 6,351 $ 8,663 $ 29,445 $ 35,638
Cost of sales 4,205 6,935 20,689 28,320
----------- ----------- ----------- -----------
Gross profit 2,146 1,728 8,756 7,318
Operating expenses 1,737 2,393 7,032 9,927
----------- ----------- ----------- -----------
Income (loss) from
operations 409 (665) 1,724 (2,609)
Other expense
Interest expense 6 34 51 176
----------- ----------- ----------- -----------
Income (loss)
before income taxes 403 (699) 1,673 (2,785)
Income tax expense
(benefit) (378) (309) (1,390) 665
----------- ----------- ----------- -----------
Net income (loss) $ 781 $ (390) $ 3,063 $ (3,450)
=========== =========== =========== ===========
Weighted average common
shares outstanding:
Basic 7,854 7,825 7,837 7,825
Diluted 8,098 7,825 8,021 7,825
Earnings (loss) per
common share:
Basic $ 0.10 $ (0.05) $ 0.39 $ (0.44)
Diluted 0.10 (0.05) 0.38 (0.44)
PINNACLE DATA SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended
December 31,
--------------------------
2010 2009
------------ ------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 3,063 $ (3,450)
------------ ------------
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Bad debt expense (55) 169
Inventory reserves 318 1,084
Depreciation and amortization 387 538
Loss on disposal of equipment - 6
Provision (benefit) for deferred income
taxes (1,638) 992
Share-based payment expense 50 115
(Increase) decrease in assets:
Accounts receivable 1,492 5,460
Inventory 197 612
Prepaid expenses and other assets 36 380
Increase (decrease) in liabilities:
Accounts payable (1,392) (1,810)
Unearned revenue (54) (53)
Other liabilities (143) 85
------------ ------------
Total adjustments (802) 7,578
------------ ------------
Net cash provided by operating
activities 2,261 4,128
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (190) (287)
------------ ------------
Net cash used in investing
activities (190) (287)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in line of credit (2,140) (2,995)
Net change in outstanding checks 126 (662)
Other 87 (147)
------------ ------------
Net cash used in financing
activities (1,927) (3,804)
------------ ------------
EFFECT OF EXCHANGE RATE ON CASH (2) 4
------------ ------------
INCREASE IN CASH 142 41
Cash at beginning of year 323 282
------------ ------------
Cash at end of year $ 465 $ 323
============ ============
Contact: Nick Tomashot Chief Financial Officer (614) 748-1150
Email Contact
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